Sustained low British gas prices point to price cap reduction

LONDON (Reuters) - The steady decline of British wholesale gas prices shows no sign of reversing this summer, which should provide some relief to households when it is reflected in a lower price cap on energy tariffs this autumn.

FILE PHOTO: A gas storage facility is seen at sunset in Manchester, Britain April 9, 2016. REUTERS/Russell Cheyne/File Photo

A cap on default electricity and gas bills - a flagship policy of British Prime Minister Theresa May to end what she called “rip-off” prices - came into force in January to set a maximum price suppliers can charge consumers on certain tariffs.

Energy market regulator Ofgem said it would remove around 1 billion pounds of overcharging from consumer bills by forcing suppliers to limit the price of their default tariffs to the level of the cap, or below.

However, Ofgem can review the cap twice a year to take into account any changes in wholesale prices and costs such as network fees, or policy costs such as environmental levies.

The regulator raised the cap by 10 percent from April 1, based on higher wholesale prices from the start of last August to the end of this January, prompting all of the so-called “big six” energy suppliers - Centrica’s British Gas, EDF’s EDF Energy, E.ON, Innogy, SSE and Scottish Power - to announce price hikes.

Since January, wholesale gas prices have fallen by around 40 percent and power by around 15 percent. At around 34-35 pence per therm, gas prices are trading at around their lowest since June 2017.

Record high supply from liquefied natural gas (LNG), strong pipeline flows and a relatively mild winter have led to European gas stores filling to seasonal highs.

And even though more and more power plants are switching from coal to gas to take advantage of more competitive prices, there is little to prompt a sustained period of buying.

“With seasonal peak gas demand now behind us, a sustained rally looks unlikely in the near term ... Other than unplanned outages, it is difficult to pinpoint a catalyst which will push European natural gas prices higher,” said Warren Patterson, head of commodities strategy at ING.

Price spikes in the wholesale gas market, if prolonged, can have a knock-on effect on retail gas prices for households.

In its next review of the level of the retail price cap in August, Ofgem will assess the period from February to the end of July. Any changes will then come into force from Oct. 1.

Analysts say the cap should be substantially lower.

“Wholesale prices have been falling recently and this could impact the next change to the cap. Should such a trend continue, almost half of the increase ... could be erased in October,” said Robert Buckley, head of retail and relationship development at Cornwall Insight.

Ofgem’s chief executive Dermot Nolan said earlier this year, when wholesale prices were falling, that if the trend continued it was likely to be reflected in the next price cap review.

Ofgem data shows the average dual fuel bill - electricity and gas - was around 1,117 pounds a year, similar to 2010 levels, but the wholesale cost proportion of that has fallen.